Who pays the piper-assessing the potential for pass-through of environmental charges within maritime shipping

Project Lead:

The pricing of CO2 emissions would significantly affect the transportation sector. However, these price signals may become distorted in the maritime transportation sector because if carriers exert market power, they are likely to “pass through” a portion of the emission charge to cargo shippers. The problem of pass-through from the regulatory perspective is that in trying to control the (environmental) behavior of an industry, it may be that firm(s) find themselves in a market situation where they can simply avoid paying and instead pass the cost directly on to users. This ability will frequently neutralize the desired abatement outcomes that motivated the externality pricing or surcharge policy in the first place.  In spite of this understanding, what is less well understood are the set of market parameters that need to be present in order to either facilitate or foil environmental pass-through. While market demand, firm costs, speed of market price adjustments as well as the number of firms in a given market have been shown to be reliable predictors of potential pass-through, by our assessment there exists almost no detailed research evaluating the critical range(s) of key parameters which can render environmental pricing pass-through either more or less likely. So as a policy assessment building on research identifying determinants of the potential to perform environmental pass-through, we will build a set of relevant economic policy experiments that will map onto,as well as shed light on the potential for environmental charge pass-through within this key international transportation industry. By exploring the issue of pass-through emission expenses, this project can  lead to a more complete understanding of the determinants of environmental pass-through in maritime shipping as well as a more a more focused and refined assessment of the parametric ranges (e.g. market demand characteristics) that will affect the ability of shipping firms to pass-through environmental externality surcharges to varying degrees.